Investing in a public company in China? Think again.
We've been raving on about the promise of China, and how Silicon Valley venture capitalists are scrambling to profit there. Other big Silicon Valley players are pouring resources into China too, the latest being Cisco, which just linked up with one of China's biggest telecom companies, state-owned China Telecom, to build its next-generation Internet backbone.
But now and then, Beijing goes to its cupboard, pulls out its big red communist flag, and waves it to remind people it can do anything it pleases. A few days ago, it did it again: It reshuffled the bosses of its three big state-owned telecom companies, all publicly traded: China Telecom, China Mobile and China Unicom. They're only the second, fourth and seventh largest Chinese companies in terms of market value -- a trifling $100 billion at stake. They're traded as New York ADRs.
Economist Donald Straszheim has been following China closely recently. He summarizes (note, we think his word "retired" should be in quotation marks):
The #1 person at China Telecom retired. The #1 at Mobile went to become #1 at Telecom. The #1 at Unicom (the worst performing) went to #1 at Mobile (the best performing). The #2 at Unicom became #1 at Unicom. Consider. No official explanation is yet available. No such action has ever occurred since Chinaâs SOEs have been traded as ADRs. Such bureaucratic shuffles still occur in the government, but the SOE carve-outs are supposed to be different.
The lesson: Investing in State-Owned-Enterprises ain't worth it. "We are not interested in these SOEs at this time," Straszheim tells his clients. For more of his observations, check this: Download file
Looking at China and India from a private investor's perspective, I am often struck by how successful private equity firms have been in India - Warburg Pincus, General Atlantic have had spectacular exits from their investments in telecom/business process outsourcing. Indeed, in a bet on investment opportunities presented by the infrastructure buildout (telecom, construction, retail, not just BPO), Warburg Pincus recently relocated its Singapore office to India! Not only that, after the US, India is the biggest geography, in terms of dollar size of investments, for Warburg Pincus.
On the contrary, the infrastructure buildout in China, which started an entire decade before India, did not produce much gain for global private equity firms. As per a statistic, all PE firms lost money in China prior to 1999.
In think this boils down to the fact that while Indian government has shun interference and let market forces run their course, Chinese counterparts seem to fall back on central planning every now and then.
Even if you look at the current icons from each country, the difference in the approaches is further amplified. Infosys, Bharti Teleocm and Reliance Infocomm were created by entrepreneurs and accomplished their feats without a holding hand from the Indian government. Even the recently privatised VSNL and BSNL, the Indian counterpart of China's SOE, continue to operate without any undue influence/help from Indian governement. Huawei, however, has strong ties to the Chinese military/governemnt, and apparently is run by an ex-military individual. Not to forget the government's control on China Telecom, Netcom and Unicom, the subject of the original blog post.
I am tempted to extrapolate these observations into a belief that while Chinese market is huge and companies cannot but take note of it, Chinese government's continued desire for central planning makes it very risky for venture capitalists to invest in that country. You never know when the next regulation may wipe out the market segment you invested in.
Ash on November 18, 2004 1:45 PMComment link
I'm sure you're right: investing in China's state enterprises is not a good idea. Behind the 'politicians' are the ƒminence Grises, often in military uniform. Anything can happen and may of the possibilities are frightful. Taiwan, Tibet, plague, natural disaster, democracy... who knows?
John Bartram on November 18, 2004 2:26 PMComment link
I agree with the sentiments expressed in earlier comments. India has far better market mechanisms, far more transparency, discipline and private investments are better protected in India when structured well ( except for rogue investements like the one made by Enron - where govt bodies would have become bankrupt in 3 years in the way deal was structured. Indian entrepreneurism, capital markets, regulatory environments, legal frameworks, free press, repatriation mechanisms all make India a much much better place to invest compared to china.
sadagopan on November 18, 2004 7:06 PMComment link
